How to Avoid Common Mistakes with Employee Rewards

Ross Brooks • 19-07-2018

Rewarding people with an end-of-year bonus or pay rise might seem like the easy way to boost employee motivation, but when it’s done incorrectly, it can actually have the opposite effect. Receiving enough compensation for our work is essential, but the impact of employee rewards on motivation relies much more on context and interpretation than how much you’re paying people.

Early thinking around workplace compensation included research by John Stacy Adams, who understood the value of perception when it came to employee rewards. Adams identified the importance of “fairness” – employees want to feel that their rewards both reflect the effort they’ve put in, and are in line with what their peers receive – but generally considered financial benefits as an effective way to boost performance.

It wasn’t until Deci & Ryan distinguished between the effects two different types of motivation (intrinsic and extrinsic) in the 1970s that researchers realised that compensation can potentially reduce productivity in the long-term.

This article originally featured in our Psychology of Employee Engagement eBook. Download it for free, and get scientific advice on motivating your team.

Be aware of the risks that come with reward

Let’s start by explaining the difference between intrinsic and extrinsic motivation. Intrinsic motivation describes the internal desire to complete a task because it’s considered interesting and valuable by the person undertaking it. On the other hand, extrinsic motivation describes the type of motivation that originates from external sources, such as reward or punishment.

When rewards are perceived as an accurate reflection of our achievements or demonstrated skill, they can support our feeling of competence, and our levels of intrinsic motivation increase.

Ultimately it’s intrinsic motivation that really powers employee engagement – and it’s easy to get your head around: we all feel far more excited and invested in doing something we love than something we don’t. In Self-Determination Theory, Deci & Ryan found that introducing rewards to a task doesn’t only serve as a short term, extrinsic boost – it can also have the effect of eroding intrinsic motivation in the long-term because the subject starts to feel like their behaviour is being controlled.

In order to be at our most motivated, Self-Determination Theory demonstrated that humans need to feel that they have autonomy in the way they approach a task. It turns out that our sense of autonomy is quite delicate, and introducing control in the form of a reward can affect how we feel about a task, even if we were intrinsically motivated to do it in the first place.

However, done correctly, rewards can actually improve our intrinsic drive to do something. When rewards are perceived as an accurate reflection of our achievements or demonstrated skill, they can support our feeling of competence, and our levels of intrinsic motivation increase.

Rewards must be a fair reflection of efforts

In 2013, building on the work of Deci & Ryan, two researchers by the names of Fall & Roussel defined the concept of “organisational justice”, which further explains the factors that underpin the relationship between compensation and autonomous motivation.

According to Fall & Roussel, rewards need to be perceived as fair in three key areas if they are to be effective:

Effort – The amount of effort we invest must be reflected in the returns we receive

Process – The decision making process surrounding compensation must be unbiased

Interpersonal – We need to be treated in a fair and respectful way by authority figures

If any one of these areas is perceived to be unfair, then the psychological tension that it creates can lead to reduced effort and even attempts to sabotage the enthusiasm of others.

What can you do to reward people fairly?

One of the quickest ways to make sure people feel fairly rewarded is to start having open conversations about compensation. These conversations should involve an explanation of the factors that are considered when calculating pay, and how this process happens. In our own research we’ve actually found that not being able to discuss pay is a bigger reason for why employee’s leave than simply just being under-rewarded.

Most businesses determine employee salaries by using a combination of market rates, personal performance, and how much that performance affects the bottom line of the business. Communicating this openly gives people a sense of the factors that are within their control, and those that aren’t. It’s also important to be transparent about what people need to do in order to reach the next pay grade, which will give your employees something to aim for and a sense of certainty around their position in the company.

… the potential negative effects associated with paying below market rate can actually be mitigated by having transparent conversations around pay.

These conversations can happen on a one-to-one basis with line managers, or can take the form of a compensation information session that happens across the business once a quarter. Either way, both initiatives should provide time for an open discussion where employees can ask questions and raise concerns.

Some companies like Buffer have even embraced complete pay transparency, in which all employee salaries are publicly visible on their website. This helps to address the gender pay gap and attract a more diverse and passionate workforce. Buffer’s model is one of the most forward thinking, but here are three, increasingly more subtle, methods of pay transparency you could consider:

Create a formula for how to calculate salaries and explain it to employees

A recent study by Payscale surveyed 71,000 employees to investigate the relationship between pay and engagement. Their study found that the potential negative effects associated with paying below market rate can actually be mitigated by having transparent conversations around pay. That doesn’t mean you can get away with paying people less, but it does highlight the importance of having open conversations around rewards.

This article originally featured in our Psychology of Employee Engagement eBook. Download it for free, and get scientific advice on motivating your team.